Shareholder Centre

Three sources of competitive advantage

In the long run, profits depend on competition. Gaurav Sodhi explains three ways businesses can keep the competition away.

How much profit a business can make ultimately comes down to one thing: competition. No matter how wonderful a company’s products, no matter how industrious its management, high margins and profits will always attract new competitors and force returns to fall – unless there’s a way to keep the competition at bay.

Buffett famously described it as an economic moat; most of us have heard it called competitive advantage and it vies with a low purchase price for the greatest source of investment returns. It’s what differentiates a fad from a sustainable business.

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